UNFAIR VALUE

Excuse me if this question violates your sense of propriety but I can’t help sharing this informative question with you. “Do you think we have successfully placed our bottom or we are still at risk of violating it?”. The question was asked last week by CNBC-TV18 anchor to an analyst. The analyst gave an elaborate answer about the market finding its bottom(as if it left it somewhere and forgot it!), followed by an esoteric monologe about something called double bottom!

But apart from the fact that it ticked my funny (and dirty) bone, it was laughable even from mathematical point of view. Sensex, like any other index, is a weighted average. It moves only because its constituents move. Tata Motors may be falling due to Singur, TCS may be falling due to fear of reduced expenditure on IT by US financial giants. Every stock out there is dancing to its own tune and yes, they are all, at the same time dancing to the cacophony created by this synchronized global fall in equity markets.

How would you guess where is the bottom of this market? Let me take the analogy little further. After enough booze has gone down the throats, there are 30 people shaking their bottoms on the dance floor. I put a machine that notes the direction of an individual’s bottom at any given moment on a scale of 0 degree north to 360 degree. Then I create an average which points the direction towards which an average bottom is pointing. I give it a name SX(pronounced ass-x). Its is not exotic enough for me, so I change it to a weighted average. I put weightages based on the weight of the individuals. So if a fat ass moves northwards, you would see SX inching northwards.

I list an exchange traded fund(ETF) of SX, I report it daily on newspapers, I create charts depicting the swaying aggregate bottom and soon there a bunch of analysts talking about tops and bottom of the SX, there are chartists discussing moving averages of our average, we have futures, derivatives, everything!

Now answer this. Isn’t an effort to predict the movements of SX really, really, asinine? The effort to predict direction of Sensex is no different. Don’t have to worry about buying dot on the bottom. Don’t try to time your entry and exits based on your gut feel about how low the markets can drop. If you were to completely ignore the market movements and devote your energies into analyzing businesses and their attractiveness at the given price, you will be better off even when you are completely wrong about market movements. Few years ago when Sensex crossed 6000 levels, I believed it was overpriced. I kept believing the same as Sensex kept moving upwards and crossed 21000. I will still be uncomfortable buying Sensex ETF today. But I don’t let my decisions about specific businesses be affected by my feeling about general market movements. I don’t try to time my frequent purchases and rare sales on the Sensex levels. And believe me, my personal experience suggests (I don’t need to quote Ben Graham on this) that ignoring Mr. Market improves your performance considerably.

And once you have invested in the business you like, you need to wait to let your business produce the returns for you. The market prices will follow the course of business in the long run. You need to avoid the temptation o booking profits or trying to sell fearing a market downturn in the hope of busing twice the number of shares at lower levels using the sale proceeds. You own a piece of business. No businessman shuts of his shop and sells his stake just because other people think his business is worth 10% less today than it was yesterday. This is what Charlie Munger calls “Sit on your ass” investing.

There are always enough opportunities to buy equity stake in businesses that are producing handsome returns. The fall of prices increases the chances that that you can do so at the right price. Don’t worry whether market has hit its bottom or not. Show your boot to the bottom of Mr. Market and do what you think is right.

2
comments:

Anonymous
said...

Hi Kamlesh,I am the same guy who had complained about your first post, and now I simply bow before you for this article. Fantastic, but please shrug off your laziness for the benefit of us ordinary souls :).